Clear Talk About Mortgages

Ways to Lower Your Closing Cost on a Sub Prime Mortgage Loan

1. Pick a Closing Date near the End of the Month

Mortgage payments are always due on the first of the month. For example, if you close on the home loan on November 15, the first payment isn't due until January 1st, which pays for the month of December. In this situation, the mortgage lender also lends money prior to December 1st, which means you'll have to pay "per diem" or per day for the 16 days in the month of November. "Per diem" interest is paid to the mortgage lender at closing. This extra cost can increase closing fees by more than $1,000. Borrowers looking for a simple way to lower their out-of-pocket expense should choose a closing date near the end of the month.

2. Ask Broker to Finance Origination and Fees into the Interest Rate

Mortgage brokers work directly with their clients to help them receive the best finance package. Because brokers devote more time to sub prime loans, the commission and fees are usually higher, which means the borrower pays more at closing. Borrowers who pay one or two points on a $250,000 will also pay an additional $2500 or $5000 at closing. If looking to reduce your costs on a sub prime loan, ask your broker to combine the points with the interest rate, wherein you pay a slightly higher rate on the loan, and save money on closing costs.

3. Ask the Lender to Pay Some of the Closing Costs

There are several ways to negotiate lower closing costs on a sub prime loan. A few mortgage lenders allow borrowers to pay a commitment fee, in return for a pre-payment penalty or interest rate increase. Due to extra paperwork and processing, fees on a sub prime loan can be twice the costs of a conforming mortgage loan.

4. Don't Place Taxes and Insurances in an Escrow Account

Sub prime borrowers can save thousands on their closing costs by not escrowing their taxes and insurances. This account is used to fund your annual property tax and insurance premiums. However, many lenders do not require escrow accounts.

These tips apply to purchase deals.

5. Ask the Seller to Pay Transfer Tax

When a real estate property is sold and ownership transferred, both parties (seller and buyer) are required to pay a transfer tax, which is usually 1% of the sale price. On a $200,000 property, you can expect to pay $2,000, which can significantly increase your overall costs. Since the seller will likely walk away from the deal with a nice profit, you can ask your real estate agent to negotiate a deal which makes the seller responsibility for paying both sides of the transfer tax. If the home seller agrees to pay the tax, you'll save a few thousand dollars on your closing costs.

6. Ask for "Seller Help"

If you can't afford the closing costs on a home loan, negotiate with the seller and ask for closing costs assistance. Some home sellers automatically offer assistance, especially if they are motivated and ready to sell the property. Nonetheless, your agent can suggest a deal, wherein the seller may be willing to contribute toward the closing. There is the option of increasing the sale price on the property, which covers the closing costs. For this method to work, the property must be worth the new sales price. Additionally, buyers should talk with their mortgage lender and make sure that seller contributions are allowed. Some lenders or loan programs only accept 3% seller contributions on a 100% financing mortgage loan, whereas others allow up to 6%. Furthermore, mortgage lenders may place other restrictions that prohibit the seller from paying certain costs.